Class-A Office Concessions In DFW May Not Last Long As Sector Improves

Time is running out to grab concessions on luxury North Texas office leases as the higher end of the market is showing signs of a quicker turnaround, market analysts say. 

"I think tenants that make concrete decisions on how to move forward in the next two to five months are going to be able to achieve more concessions than tenants that wait after that period of time," Transwestern Vice President - Tenant Advisory Services Brad Devine said. 

That advice rings particularly true when it comes to the Class-A office segment in DFW, the assets with the best amenities and build-outs.

First-quarter 2021 data from Transwestern shows without the loss of 1.36M SF of office space tied to the bankruptcy of JCPenney Co. and the end of its use of its West Plano office campus, Class-A net office absorption in Q1 2021 would have come in at roughly negative 114K SF in DFW, compared to negative 400K SF the previous quarter. 

"We have hit the turning point, and we are recovering," Transwestern Research Manager Andrew Matheny said.

In a report released last month, Transwestern predicted a small decline in effective rent in 2021 with historical data suggesting some tenants may receive up to one additional free month as a concession. But so far, the brokerage said this month, effective rents in Dallas continue to grow due to landlords staying firm on starting rents and their ability to recover losses on concessions through the signing of longer-term leases. 

Common concessions available in the market include a few extra free months for four-plus-year deals, which is standard for recessionary periods, Matheny said. 

"Overall, there has not been a widespread or significant move away from the office, especially now that we have been in this for over a year. A lot of companies that were working hard before the pandemic to establish or maintain their company culture and collaboration have said working from home was a necessity when this started, but now we are worried about making sure we keep our company culture intact, and they see the office as a critical component of doing that," Matheny added. 

Nearly 40% of DFW office users had returned to the office by the end of March, according to data from access and security tech provider Kastle Systems, which gets the number by tracking keycard swipes at buildings using its entry security systems.

As more companies evaluate the future of their offices, some brokers are seeing subtle moves away from Class-B to Class-A buildings when discounts and other concessions become available. Matheny said about 21% of Class-A office properties in DFW are seeing positive absorption so far this year.

"I do have a lot of clients that are evaluating Class-A space if they were previously in Class-B and trying to upgrade their space for employees as they bring them back to the office and provide them with more amenities," Devine said. 

Class-B remains in a state of uncertainty; Transwestern notes in its report that Class-B properties posted negative absorption of 1.5M SF in the first quarter, an indicator that smaller main street tenants occupying these types of spaces are still struggling. 

But with Class-A recovering and the sublease market remaining stable at 9M SF in Q1, Transwestern predicts a more robust recovery in the office space later this year, with top-tier assets bottoming and rebounding first, followed by Class-B later in the year. 

"Tenants have to realize that this recovery is going to be so unusual compared to past ones, so the reason it is only going to be another two to five months for really great deals is because there is going to be so much more pent-up demand for office space that comes back all at once," Matheny said.